Lost in the recent US-China trade headlines about tariffs, indictments, trade secrets theft, cyber espionage and other matters is a potentially important development lurking in last year’s US export controls statute. Essentially, Congress has directed the Executive Branch to review the current scope of US export controls on China and other countries subject to arms embargoes, and to implement changes to address any vulnerabilities. This review is supposed to be done and any regulatory changes implemented by May 10.
Specifically, Section 1759 of the Export Control Reform Act of 2018 (ECRA), on which we previously advised, requires the US government to review the scope of export controls currently in place under the Export Administration Regulations (EAR) for arms embargoed countries like China. Specifically, ECRA requires the Commerce Department and other relevant agencies (including the Departments of Defense, State and Energy) to review the scope of export controls on transactions involving “military end uses and military end users” in arms embargoed countries like China, along with, more broadly, the types of goods, software and technology that currently are not controlled for such countries. This is separate from the ongoing review of export controls on “emerging and foundational technologies” that has been the subject of a lot of recent discussion elsewhere.
So what should we expect from this review? It’s possible that the Executive Branch could maintain the status quo and find that current regulations are appropriate. But given current concerns in the Executive Branch and Congress involving China, and in light of the US government’s relatively permissive current approach to some exports to China, we wouldn’t be surprised to see changes. One possibility is that BIS could revise and expand the current restrictions in Section 744.21 of the EAR on exports for “military end-uses” in China, which is a relatively narrow provision. It only applies to a short list of enumerated items, and the definition of “military end use” is not very broad, essentially only applying to “incorporation” of an item into other military products or technologies or items provided for the “use,” “development,” or “production” of other military products or technologies, along with the deployment of certain aircraft and gas turbine engines. Section 744.21 does not currently restrict exports for most direct uses by the Chinese military. BIS could expand this restriction to apply to any “military end user” in China, a concept that already exists in the regulations for Russia and Venezuela, and to a lesser extent for Iraq. BIS could also do away with the list of items that narrows the scope of this restriction and instead say that it applies to any items exported to China or a broader list of controlled items. It should go without saying that an extension of export controls to military-linked parties in China could have serious implications for international trade and technology transfers.
Companies doing business with China, particularly in high-tech sectors, should keep an eye on this issue. We will continue to monitor these developments.